Treasury Nominee Paul O'Neill: Just in Time for Trouble
The problem is that none of Bush's lead advisers have displayed any special feel for financial markets--especially markets that are scared and imploding. The conservative financial experts I talked with all delivered the same warning. "O'Neill needs to have a serious banker at his side, someone who has done a lot of financial restructurings and bankruptcies," one of them said. "Because that's what is coming."
O'Neill has been relieved of an obvious first challenge--coaxing the Fed chairman into cutting interest rates--because that job was done for him by the frightened financial markets. Falling stock prices and market interest rates, along with plummeting sales and production, delivered a message of terror--the markets' fear that Greenspan was dangerously behind events. He was thus compelled to start cutting rates. Many market players figure it's already too late, however, and Greenspan's wizard status is swiftly evaporating, at least among those who understand what's happening. So Bush's team will begin by blaming Clinton/Gore for the rising unemployment and corporate bankruptcies, while privately nudging Greenspan to keep on easing credit terms. A deep distrust toward Greenspan lingers in the Bush family--a sense that he broke promises and allowed high unemployment to linger much too long after the 1991 recession, effectively dooming George père's re-election campaign in 1992. This time, they will not wait passively on the chairman's wisdom, and Bush Jr. has real leverage he can apply. The seven-member Federal Reserve Board has two vacancies and a third one expected. The White House can surround Greenspan at the boardroom table by appointing friendly critics and even a possible successor.
A recession that comes early in a new President's term--and is over well before he's up for re-election--can wind up as smart political timing, but Bush may lose his Congressional majority in the process. While Ronald Reagan enacted a radical conservative agenda during his first year in office, his popularity sank as the ugly recession worsened; Democrats picked up twenty-seven House seats in the off-year election of 1982. By 1984, however, it was "morning again in America," and the Gipper won in a landslide. If Bush's advisers are as shrewd as they appear, they will push hard for their big ideas up front and, meanwhile, do whatever they must to reverse the economic bloodletting.
The more ominous possibility facing the Bush presidency is that given neglected realities inherited from the Clinton years, this downturn could renew globalized financial crisis in Asia, Latin America or elsewhere. Only this one could not be blamed on "crony capitalism" or other establishment canards. The $360-billion-a-year trade deficit in the United States has kept Japan and many developing countries afloat in recent years, though a long way from genuine recovery. If the United States becomes mired in recession, Americans will buy far fewer imports, and that will reignite financial failures in the exporting nations. Their panic can flow right back into the US financial system, with banks and brokerages demanding another round of IMF bailouts. O'Neill and company may find themselves standing in a circle of bonfires.
The specter of bad times coming does, of course, add momentum for major tax-cutting legislation--a centerpiece in Dubya's campaign--but it's not obvious how Bush's retrograde measure would actually help the economy (40 percent goes to the very wealthy, as that fellow Gore kept reminding us). Some elements, like abolishing the inheritance tax, may even generate drag on economic activity. The Bush team talks like conservative Keynesians, but in the real world, economic stimulus requires steeply progressive tax cuts--putting money in the hands of people who will promptly spend it. That means quick rate cuts or temporary tax credits that skip over the upper brackets for a change and deliver the money to the bottom half of the income ladder. Democrats are wrong-footed by events too. After several years of indulging in Coolidge-Hoover pieties about paying down the national debt, Democrats must scurry now to come up with a progressive--don't say liberal--tax-cutting proposal of their own. Clintonism is over, and they had better shake out the cobwebs quickly, because their choices on who needs tax relief and who doesn't will define them for the 2002 election and beyond.
The essential handicap in using fiscal policy to restart the economy (one that has always burdened Keynesian economics) is the problem of timing. In the best circumstances, it can take six or eight months to enact a major stimulus package, and even if the tax cuts are postdated to January 1, the money arrives too late to stanch the contraction. If Democrats are alert and public-spirited, they will propose a quick, emergency reduction in paycheck deductions with a commitment to support a second, broader tax measure later in the year. They should also call for stand-still protection for those working people drowning in debts who lose their jobs--a temporary safety net that keeps them out of bankruptcy until the economy revives. These and other measures are, of course, way beyond the present imagination of either party. More likely, the tax bill will turn into a special-interest bidding war in which both parties compete to pay back their accumulated obligations to lobbyists and contributors.
The new Republican majority, already frail and dubious, has been taken hostage by these economic portents even before it assumes power. A "normal" recession of brief duration might be manageable. A longer, more profound unwinding will shake the foundations of Republicans and Democrats alike.